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Settlement Negotiations with Two-Sided Asymmetric Information: Model Duality, Information Distribution and Efficiency

  • Andrew F. Daughety

    (Economics)

  • Jennifer F. Reinganum

    (Univ. of Iowa)

We analyze a settlement and litigation game in which both parties possess private information relevant to the value of a claim. The plaintiff knows the level of damages, while the defendant knows the probability he will be held liable for those damages. We consider two alternatives: (1) the plaintiff proposes a settlement, which the defendant accepts or rejects; and (2) the defendant proposes a settlement, which the plaintiff accepts or rejects. Despite the extensive symmetry of the model, these alternatives will generally result in different equilibrium expected frequencies of trial, and therefore different social efficiencies.

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Paper provided by EconWPA in its series Game Theory and Information with number 9403009.

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Length: 22 pages
Date of creation: 31 Mar 1994
Date of revision:
Handle: RePEc:wpa:wuwpga:9403009
Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- 2sided.941 (body in WP5.1, 22 pages)
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  1. Douglas Gale, 2010. "Limit theorems for markets with sequential bargaining," Levine's Working Paper Archive 621, David K. Levine.
  2. Sobel, Joel & Takahashi, Ichiro, 1983. "A Multistage Model of Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 411-26, July.
  3. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  4. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  5. Samuelson, L., 1988. "Disagreement In Markets With Matching And Bargaining," Papers 9-86-1, Pennsylvania State - Department of Economics.
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  7. Steven Shavell, 1981. "Suit and Settlement vs. Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs," NBER Working Papers 0662, National Bureau of Economic Research, Inc.
  8. Daughety, Adnrew F & Reinganum, Jennifer F, 1993. "Endogenous Sequencing in Models of Settlement and Litigation," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 314-48, October.
  9. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September.
  10. Rubinstein, Ariel & Wolinsky, Asher, 1990. "Decentralized Trading, Strategic Behaviour and the Walrasian Outcome," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 63-78, January.
  11. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  12. Reinganum, Jennifer F, 1988. "Plea Bargaining and Prosecutorial Discretion," American Economic Review, American Economic Association, vol. 78(4), pages 713-28, September.
  13. Andrew F. Daughety & Jennifer F. Reinganum, 1995. "Keeping Society in the Dark: On the Admissibility of Pretrial Negotiations as Evidence in Court," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 203-221, Summer.
  14. Ausubel, Lawrence M. & Cramton, Peter & Deneckere, Raymond J., 2002. "Bargaining with incomplete information," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 50, pages 1897-1945 Elsevier.
  15. Binmore, Ken G & Herrero, M J, 1988. "Security Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 33-48, January.
  16. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  17. Peter Cramton & Joseph S. Tracy, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," Papers of Peter Cramton 92aer, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  18. Samuelson, Larry, 1992. "Disagreement in Markets with Matching and Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 177-85, January.
  19. Gale, Douglas M, 1986. "Bargaining and Competition Part I: Characterization," Econometrica, Econometric Society, vol. 54(4), pages 785-806, July.
  20. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  21. Binmore, Ken G & Herrero, M J, 1988. "Matching and Bargaining in Dynamic Markets," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 17-31, January.
  22. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
  23. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1 McMaster University Archive for the History of Economic Thought.
  24. Salant, Stephen W., 1984. "Litigation of Settlement Demands Questioned by Bayesian Defendants," Working Papers 516, California Institute of Technology, Division of the Humanities and Social Sciences.
  25. Rubinstein, Ariel, 1985. "A Bargaining Model with Incomplete Information about Time Preferences," Econometrica, Econometric Society, vol. 53(5), pages 1151-72, September.
  26. I.P.L. P'ng, 1983. "Strategic Behavior in Suit, Settlement, and Trial," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 539-550, Autumn.
  27. Schweizer, Urs, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 163-77, April.
  28. Cramton, Peter C, 1992. "Strategic Delay in Bargaining with Two-Sided Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 205-25, January.
  29. Fudenberg, Drew & Tirole, Jean, 1983. "Sequential Bargaining with Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 50(2), pages 221-47, April.
  30. Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 345-64, July.
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